Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Direct Listings Instead of IPOs
Transcript
- Lucas: So it's July 2026, and if you're a founder thinking about taking your company public, the default playbook is still the traditional IPO. But there's this alternative that's been gaining traction, especially among tech companies that don't need to raise new capital. I'm talking about direct listings. Luna: Right, and the poster child for that is Spotify back in 2018. They went public via a direct listing on the New York Stock Exchange, no underwriters, no traditional roadshow. It was a big deal at the time. Lucas: Exactly. And what's interesting is that a lot of founders still don't fully understand how a direct listing differs from an IPO, especially when it comes to liquidity and control. So let's dig into that. First, the mechanics: in a direct listing, existing shareholders—founders, employees, early investors—sell their shares directly to the public. No new shares are created, so the company doesn't raise any money. Luna: That's a key distinction. In a traditional IPO, the company issues new shares and raises capital. In a direct listing, it's purely a liquidity event for existing holders. Lucas: And that's why it appeals to companies that are already profitable or have plenty of cash. Spotify didn't need the money. They had over a billion euros in cash. What they wanted was a public market for their stock without the dilution and the lockup periods that come with an IPO. Lucas: Lockup periods are a huge factor. In a typical IPO, insiders can't sell their shares for 90 to 180 days. That creates this overhang where the stock price can get hammered once the lockup expires. Direct listings usually have no lockup at all. Luna: No lockup sounds great for liquidity, but doesn't that also create risk? If all the early investors dump their shares on day one, the price could collapse. Lucas: That's the concern, and it's valid. But in practice, most large shareholders don't sell everything immediately. They stagger their sales. And the market sets the opening price based on a auction where buy and sell orders are matched. So there's a price discovery mechanism, but it's different from an IPO where underwriters set the price based on book building. Lucas: And this is where the donation segment naturally fits. Actually, before I go deeper on that, I just want to say something. If you find these kinds of breakdowns useful for what you're building or running, a small group of listeners already chips in monthly through buy me a coffee dot com slash fexingo. That's what keeps this show ad-free and focused on the nuts and bolts. Luna: Yeah, it's a simple way to support the work we do. And it's really appreciated. Lucas: So back to price discovery. In a traditional IPO, underwriters like Goldman Sachs or Morgan Stanley gauge investor demand during the roadshow and set the IPO price. They also have a greenshoe option to stabilize the stock. In a direct listing, there's no underwriter stabilization. The price is whatever the market decides on day one. Luna: And that can lead to volatility. Spotify opened at $165.90, above the reference price of $132, and ended the first day at $149. So it was a wild ride. Lucas: But the key point is that the reference price isn't the IPO price—it's just a benchmark set by the exchange. The actual opening price comes from the auction. And for Spotify, it worked out well. The stock has done well over time. Luna: Now, fast forward to 2026. We've seen a few more direct listings since then—like Slack in 2019, though that was later acquired by Salesforce, and Coinbase in 2021. Coinbase's direct listing was huge, but the stock has been volatile. Today, Coinbase is down about 4% over the past five days, trading around $158. Lucas: Right, and that volatility is partly because of the crypto market, but also because the direct listing structure means there's no lockup to cushion the selling pressure. On the other hand, Meta—formerly Facebook—has been up 7% over the same period. But Meta went public via a traditional IPO back in 2012, and they had a lockup that caused a lot of pain. Luna: So for a founder, the choice between a direct listing and an IPO really comes down to: do you need to raise money, or do you just want liquidity? And can you handle the volatility of no underwriter support? Lucas: Exactly. And there's another factor: the regulatory environment. The SEC has updated its rules to make direct listings more accessible. For example, they now allow companies to raise capital through a direct listing too, not just sell existing shares. That's a recent change that blurs the line. Luna: Oh, I didn't know that. So you can do a primary direct listing where you issue new shares and sell them alongside existing ones? Lucas: Yes, the SEC approved that in 2020 for NYSE listings. It gives companies the best of both worlds: the liquidity and no-lockup benefits of a direct listing, but the ability to raise capital like an IPO. But it's still not as common because the process is complex. Luna: And then there's the legal risk angle. The New York Times is currently suing OpenAI over copyright, and that case has implications for any company using AI in their business. If you're a founder about to go public, any pending litigation can be a red flag for investors. Lucas: That's a great point. Legal risk is a big factor in exit timing. If a direct listing means you're more exposed because there's no underwriter to shield you, litigation can be even more damaging. But the flip side is that in an IPO, underwriters conduct due diligence and can help manage those risks. Lucas: So, to wrap up: direct listings aren't for everyone. They're best for well-known companies with strong brand recognition—like Spotify or Coinbase—that don't need to raise new capital and want to avoid dilution and lockups. For smaller or lesser-known companies, a traditional IPO with underwriter support is still the safer bet. Luna: And the data supports that. Companies that do direct listings tend to be larger, more mature, and have a clear narrative that the market understands. That's why you don't see many biotech or hardware startups doing direct listings. Lucas: Right. So if you're a founder listening, ask yourself: do I need the capital and the hand-holding of an underwriter, or do I just want my shareholders to have immediate liquidity? The answer will point you toward the right path. Luna: And maybe check out some of our other episodes on lockup agreements and tender offers, because those tie into this decision too. Lucas: Absolutely. That's it for today. Thanks for listening.